14 Jul 2017

14 Jul 2017

Wholesale Natural Gas is currently trading at $2.961 per DTH

The natural gas market continues to be driven by short-term weather forecasts. Last week the market gapped lower in light trading around the July 4th Holiday only to recover much of that value due to forecasts calling for warmer weather. One news item did catch my eye as it involved my old friends at TVA. TVA set a new demand high for this summer when it sent out 28,033 MW at 5:00 pm on July 11th at an average temperature of 91 degrees F. First, I would note that that power demand is more than 5,000 MW lower than peak summer demand before the Great Recession. Second, I would mention that TVA has retired roughly 5,000 MW of coal-fired generation, so that even at this lower power demand level they had to be consuming gas at near previous peak levels. They should have been helped by the new Watts Bar 2 nuclear unit, but that unit has been off-line almost since it came on-line when support beams for a condenser unit collapsed and ruptured the condenser. FYI, the 28,033 MW send-out is roughly 5X the power demand of Wisconsin (and at a 40% cheaper rate than Wisconsin retail power).

As you can see the weather forecast have been reasonably accurate of late, with cooler weather in our area while heat is wrapped around us. With normal heat in the south and up the east coast we will have to keep a close eye on the air conditioning load. The storage report came in just a tad light this week at a +57 BCF build in storage. This was short -4 BCF against last year and -16 BCF against the five year average. In any event, the news had little impact on the market as the August contract lost -2.4 cents for the day to finish at $2.961 /Dth.

Overall, the market continues to hold its breath. June has to be characterized as lackluster. Despite having mild weather this year we only added +55 BCF of natural gas to our inventory against last year. BP Energy is reporting that demand for gas in June dropped 3.42 BCF/day year over year which suggests that we should have had larger injections, everything being equal. The problem is that we are still seeing lower production levels than last year even as we see increasing exports, so things are definitely not equal year on year.

That brings us to July and August. Last year we put very limited quantities of gas in the ground during those two summer months. In fact we had a very rare summer withdrawal at the end of July last year. As we then look at the current situation, we are continuing to see very lethargic production numbers and significantly higher LNG and Mexican exports. Thus if July and August are close to normal heat and air conditioning load this summer, I think the door will have to swing open for the Bulls (not bulldogs) to make a run in the near future.

We established a slightly lower week last week so it has replaced February 23rd as our lower boundary in the price changes graph. Week-on-week the 2017-18 winter strip was up 8.4 cents this week to $3.216 /Dth while the 2018-19 winter strip gained 6.1 cents to $3.052 /Dth. The 2018 calendar strip was up 7.3 cents to $2.990 /Dth while the 2019 calendar strip was up 0.1 cents to $2.805 /Dth.

30 Jun 2017

30 Jun 2017

Wholesale Natural Gas is currently trading at $3.042 per DTH

As you can see from the lead in, prices have popped up again this week. Just like in Casablanca we will looking at the usual suspects this week – weather and production. Every weather chart that NOAA puts out for 2017 is again showing red, including the most recent 6-10 day chart.

As of today the extreme heat is still concentrated in the SW, West Texas and part of the plains. However, at the moment, Tuscaloosa (Roll Tide) and Madison (Go Badgers) are both showing the same temperature. But despite these much more mild current temperatures in the US, especially in the SE, we are still not seeing the injections into gas storage that we would like to be seeing right now. While today’s report of a +46 BCF storage build (slightly below expectations) was 5 BCF stronger than last year it was also -26 BCF off the 5 year average. This still leaves us -319 BCF behind last year’s pace. I am not sure yet how other analysts are viewing the report, but to only inject +46 BCF into storage when much of the air conditioning demand is idling is very disappointing.

Certainly the warmer weather forecasts along with gas production concerns played a major role in pushing the July gas contract off of its recent $2.877 /Dth low to its close yesterday at $3.067 /Dth. With the August contract moving to the front position there was an attempt to push higher but the Bulls just could not gain ground today so we saw the August contract close at $3.042 /Dth in its first full day as prompt.

With the markets moving up we saw the 2017-18 Winter strip gain 9.8 cents this week to $3.272 /Dth while the 2018-19 Winter strip sits at $3.053 /Dth unchanged for the week. The 2018 Calendar strip was up 2.7 cents this week to $2.991 /Dth while the 2019 Calendar strip was at $2.849 /Dth off 2.2 cents.

I will be on vacation next so I would like to wish everyone a Happy July 4th Holiday.

23 Jun 2017

23 Jun 2017

Wholesale Natural Gas is currently trading at $2.894 per DTH

Too hot to fly. Too hot to fly? You know it just takes me a bit to wrap my head around that statement. Most of us know that electronics can have problems with the heat. They eventually had to put air conditioning into our tanks, not because of crew comfort, but because the electronics that ran everything from the laser range finder to the gun stabilization system would fry out after a few days in the desert. But too hot to fly?

Fortunately, that extreme heat is confined into the US southwest, although some of it was creeping into west Texas and the plains states today. The east continues to be cooler than normal thanks now to Tropical Storm Cindy. Nevertheless, I was piqued by a gas market comment that I have seen every week for about six weeks now. “Milder weather should allow natural gas inventory building to ramp up the pace.” We certainly got a hint that this might happen the week of Memorial Day, but today’s storage build of +61 BCF has to be characterized as another disappointment regardless of “expectations”.

As I mentioned last week, people have been playing up the production gains out of the Permian and the Marcellus basins. Those statements are usually accompanied by a comment about how we have doubled the number of drilling rigs in the last year. But here is the chart that tells the rest of the story:

As you can see, we have indeed doubled the drilling rigs, but that still puts us well below the number of rigs that were drilling when we were adding abundant new supplies. Moreover, while drilling rig efficiency is improving it is not improving by the leaps and bounds of a few years ago. So again, where is all of this new gas production the market is expecting and when will it show up? Or is any new production going to be soaked up by the increasing commercial, industrial and export demand we are seeing? As always, the weather will play a major factor, but it continues to be a wild card. NOAA is still forecasting a hot July, but then again it forecasted a hot June and we have seen how that has worked out for just about everywhere except the US Southwest.

On Monday the market gapped lower on forecasts for continued mild weather, but it has since struggled to build momentum for a further move in either direction. Again, while today’s injection was slightly above expectation it lost ground against the year-on-year inventory and the 5 year average inventory, so the July contract closed today at $2.894 /Dth, up 0.1 cents for the day.

On the change chart we can see that the front of the curve has now moved below the February 23rd low that we had been tracking. There are at least two more things to keep an eye on in coming weeks. First, the last two weeks of June last year were hot with very low storage injections. If we do not see significant additions to inventory versus last year in the next two weeks the bears are going to have a serious problem. Second, albeit a longer term consideration, is that oil closed at $45.22 a barrel today which is well below the $50 that analyst claim the shale oil plays need to be economic. Why is that important? Oil shale production is important because a lot of associated natural gas comes from those oil fields. A number of the Houston analysts have said that we will not have real growth in gas production with oil below $50 a barrel.

Do you ever feel like you are playing roulette and your not sure where that spinning wheel is going to land? Stay tuned.